USING OCIPs AND CCIPS TO BRING ORDER TO PROJECT INSURANCE

USING OCIPs AND CCIPS

TO BRING ORDER TO

PROJECT INSURANCE

CMAA Southern California Chapter

October 30, 2014 8:00 a.m.

The Grand Conference Center 4101 E. Willow Street

Panel

 Greg Kildare

– Executive Officer Risk Management

– Los Angeles County MTA (Owner)

 Kevin Peters

– Senior Vice President

– Old Republic Construction Program Group (Insurer)

 Jim Holobaugh

– Senior Vice President

– Alliant Insurance Services (Broker)

 Tom Long

Traditional Insurance Approach General Contractor Subcontractors Owner General Contractor Subcontractors Owner Wrap-up Approach

CHARACTERISTICS OF A CONTROLLED

INSURANCE PROGRAM (“CIP”)

 Multiple Insurers

 Inadequate Limits

 Potential Gaps in Coverage

 Potentially Uninsured Subcontractors

 Cross Litigation Between Contractors

 Indemnity Issues

 Control

 Cost Reduction

 Higher Coverage Limits

 Consistent Coverage Across Contractors

 Coordinated Claims

 Minimize Cross Litigation/Subrogation

Additional Coverages Buil de r’ s Ri sk Cont rac to rs P ol luti on L iab ili ty Pol luti on L eg al L iab ili ty $2 5 Mill ion CPL PLL Ow ner s Pr ot ec tiv e Pr ofes sion al Indemn ity OPPI W orke rs ’ Co mpen sat ion Excess Liability $50 - $200 Million Excess

Follow Form Excess Liability

Emp loy e r’ s Li ab ili ty General Liability

Enrolled vs. Excluded OCIPs and CCIPs



General Contractor



Eligible subcontractors

with on-site labor



Both prime and

lower-tier subcontractors

 Off-site labor

 Demolition – Structural

 Hazardous materials contractors/transporters

 Architects, engineers, surveyors

 Vendors, suppliers, purchase orders, fabricators, material haulers, truckers

 Others at the discretion of Risk Management

Financial Model

Fixed Expenses

(Insurance, Excess, Administration)

Loss Ratio Typical Savings (0.5% - 1.2%) of Construction Cost 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 0% Owner Cost without OCIP

Loss Sensitive Program

Minimum Cost Maxi mum Sav ing s Claims Cost Avoidance Minimum Savings

Owner Max. Cost with OCIP

Losses

Contractor OCIP

Savings _{= - -}

Losses

Contractor

Insurance Costs OCIP Costs

Savings _{= - -}

PROJECT(S)

Construction Value $ 350,000,000

Payroll $ 70,000,000 20%

INSURANCE REVENUE/COST AVOIDANCE PREMIUM % OF CV

Owner Charge or Contractor Credits

-WC/GL/XS $ 9,625,000 2.75%

Total $ 9,625,000

CCIP PROGRAM COSTS MINIMUM LOSS AGGREGATE MAXIMUM

Combined WC/GL/Excess/Administration $ 3,325,000 $ 4,900,000 $ 8,225,000

Excess Premium $ 1,200,000 $ 1,200,000

Total CCIP Program Costs $ 4,525,000 $ 4,900,000 $ 9,425,000

1.29% 1.40% 2.69%

LOSSES

PROGRAM COSTS PLUS

LOSSES INSURANCE CREDITS PROGRAM SAVINGS % OF CV

0% $ - $ 4,525,000 $ 9,625,000 $ 5,100,000 1.46% 10% $ 490,000 $ 5,015,000 $ 9,625,000 $ 4,610,000 1.32% 20% $ 980,000 $ 5,505,000 $ 9,625,000 $ 4,120,000 1.18% 30% $ 1,470,000 $ 5,995,000 $ 9,625,000 $ 3,630,000 1.04% 40% $ 1,960,000 $ 6,485,000 $ 9,625,000 $ 3,140,000 0.90% 50% $ 2,450,000 $ 6,975,000 $ 9,625,000 $ 2,650,000 0.76% 60% $ 2,940,000 $ 7,465,000 $ 9,625,000 $ 2,160,000 0.62% 70% $ 3,430,000 $ 7,955,000 $ 9,625,000 $ 1,670,000 0.48% 80% $ 3,920,000 $ 8,445,000 $ 9,625,000 $ 1,180,000 0.34% 90% $ 4,410,000 $ 8,935,000 $ 9,625,000 $ 690,000 0.20% 100% $ 4,900,000 $ 9,425,000 $ 9,625,000 $ 200,000 0.06%

Savings Estimated

Net Bid Insurance _{Add Alternate}

All Insurance Costs Identified and Removed Savings Identified Up-Front (Not adjusted by project end) Bid Credit Tracking Subcontractor Bids Without Insurance (Bid Accepted) Insurance Cost Identified & Reviewed (Bid Adjusted) Subcontractor Bids With Insurance Included (Bid Adjusted)

Identifying Insurance Costs

Ensure proper bidding

 Insurance Cost Worksheet

 Contract language

 Education

RFP Credit Approach - Example

Fees Fee Percentage

(Fee as % of the Const. Cost Budget)

Fee in $

Design Fees 7.53% $3,012,000 Site Management Fee 4.27% $1,708,000 Design Builder Bonds .72% $288,000 Subcontractor Bonds .30% $120,000 Overhead and Profit 3.70% $1,480,000 Total Fee 16.52% $6,608,000 OCIP Credit (GC & Subs)* -2.50% * -$1,000,000*

Basis of Award 14.02% $5,608,000

Acme Hospital

OCIP Insurance Manual

 All subcontractors should receive an

Insurance Manual when bidding and with their contract agreement

 Functions as a “user-guide” and outlines the wrap-up administrative process

 Explains requirements and responsibilities

 Details off-site insurance required of subcontractors

 Includes project roles and contacts

 Describes coverages provided

OCIP Administration Flowchart

Subcontractor

• Subcontractor supplied with OCIP Manual

• Contractor Notifies Broker via Notice of Award (NOA)

Broker Adds contractor to RMIS system

• Broker sends Login information to contractor

Contractor Enrolls Online

• Any additional Subcontractors identified during enrollment process

Enrollment Completed

•COVERAGE STARTS

• Policy number issued by Carrier • Welcome packet and COI issued

by Broker

Contractor Ongoing Duties

•Online monthly payroll reporting directly to Broker •Offsite Certificates updates Contract Closeout

• Completion of work

• Notification via NOC or online entry

Project Closed

COMPARING CIPS WITH TRADITIONAL

INSURANCE

OCIPs AND CCIPs

 Common limits and scope.

 Common defense, lower litigation costs.

 Added burden of administration.

TRADITIONAL INSURANCE  Orphan shares and gaps.

 Separate defense and finger pointing.

COMPARING CIPS WITH TRADITIONAL

INSURANCE (contd.)

OCIPs AND CCIPs

 Project specific limits.

 Coverage term to match project term.

 Control over coverage scope.

TRADITIONAL INSURANCE  Limits for some lines

shared with other projects.

 Annual renewals.

COMPARING CIPS WITH TRADITIONAL

INSURANCE (contd.)

OCIPs AND CCIPs

 Lower costs if better claim experience though

centralized risk

management and a loss sensitive premium (retro).

TRADITIONAL INSURANCE

 More predictability of

COMPARING CIPS WITH TRADITIONAL

INSURANCE (contd.)

OCIPs AND CCIPs

 Enrollment of subs means more control, easier small sub participation.

 Greater insurer insolvency risk. Compensate with

drop down and participation.

TRADITIONAL INSURANCE  Less control, harder for

subs to meet requirements.

COMPARING CIPS WITH TRADITIONAL

INSURANCE (contd.)

OCIPs AND CCIPs

 Builder’s risk coverage requires a formal

enrollment process.

TRADITIONAL INSURANCE

COMPARING CIPS WITH TRADITIONAL

INSURANCE (contd.)

OCIPs AND CCIPs

 Professional liability

OCIPs vs. CCIPs

Considerations

OCIPs

 Owner receives maximum financial benefit

 Owner posts collateral and pays premiums

 Same coverage terms

 Dedicated program limits

 Owner controls claims for completed operations period

CCIPs

 GC receives maximum financial benefit

 Contractor posts collateral and pays premiums

 Same coverage terms

 Limits can be dedicated or

shared depending on program structure

 General contractor controls

OCIPs vs. CCIPs

Considerations

OCIPs

 Broker provides claims advocacy

 Owner sets contractor

insurance requirements and assembles underwriting data

 Owner monitors program progress

 Broker administers program

 Owner can include multiple projects in its OCIP program through a “rolling” OCIP

CCIPs

 GC manages contractor insurance requirements and program

administration

 Broker administers the program

 Other projects cannot be included in the same

OCIPs vs. CCIPs

Considerations

OCIPs

 Startup costs can be significant

 Claim resolution can be difficult in the public sector context

 Can accommodate multiple prime contractors at multiple jobsites

 Difficult to access

contractor’s cost of risk during selection

CCIPs

 Better alignment of incentives for loss control

 Premiums tend to be a bit cheaper.

 Large contractors already have rolling programs (no startup costs)

 Need one prime contractor

Limited Indemnity for Construction

Defects

 Broad Indemnities and the Crawford Surprise [44 Cal. 4th _{541 (2008)].}

– Old Rule allowed standard indemnities by which GCs and owners could be indemnified by others for their own negligence.

– Crawford Must a subcontractor who was found not

to have done anything wrong indemnify a GC for costs of defense?

– Yes! The California Supreme Court arguably made

Limited Indemnity for Construction

Defects (contd.)

 Legislative action. Civil Code section 2782 et. seq. AB 2738 restrictions protected subcontractors. SB 474 went further to protect all “promisors.”

 Indemnities from all parties to a construction contract now arguably limited to their own negligence only. “Active negligence” of GCs and public agencies and “sole negligence” of private owners may not be

Limited Indemnity for Construction

Defects (contd.)

 The new indemnity limitations apply to “construction defects” but not “design defects.”

Other Practical Considerations



How does the owner assure compliance with

contract insurance requirements without control

of and review of the CCIP policy?



How do you fit the scope of the CIP (project

coverage) with other insurance?

– How do you address off site manufacturing risks?

Other Practical Considerations



How do you assure the hoped for savings in any

CIP?

– Is the bid specified with and without the CIP?

– Do you have to audit the rating base on other

Other Practical Considerations

 Rolling wrap ups? What are they? Have you used them and what are their advantages and disadvantages?